Trade Wars: Easier to avoid than to win

In our previous newsletter we posed the question as to whether trade wars are easy to win and discussed the impact that policy can have on the global economy and commodity markets. As the verdict largely went against economic warfare, a sudden change of mind by the US administration may indicate that the President perhaps peeks at our newsletter when he isn’t watching Fox and Friends. However unlikely, the message from US Treasury Secretary Steven Mnuchin was that the trade war is on hold for now.

Nevertheless, the spectrum of a trade war still looms over the global economy, and the US Administration has also made frequent use of the sanctions tool to interfere in global trade and pressure adversaries. Needless to say, the President’s actions left their mark on commodity markets.

First there was aluminium. Although President Trump agreed to delay the 25% and 10% tariffs on steel and aluminium respectively for its allies, he still managed to cause mayhem in the aluminium market by imposing sanctions against a number of Russian oligarchs and government officials. Among the blacklisted individuals was Oleg Deripaska who at that time controlled Rusal – the largest aluminium producer outside of China. The immediate result was a 25% surge in the price of aluminium to 2,500 USD/ton before falling back to 2,300 USD/ton.

And then there was Iran. On 9 May, the President officially withdrew the United States from the agreement supposed to curb the Islamic Republic’s nuclear weapons program which Mr. Trump described as a “horrible, one-sided deal”. While the President has vowed even harsher sanctions against Iran, the immediate impact is a reinstatement within 180 days of all of the sanctions on Iran that were relaxed under the agreement. As global oil supply was already tightening, President Trump’s announcement added further fuel to the fire as the price of Brent crude oil touched 80 USD/barrel for the first time in since 2014.

Nevertheless, not all action in the commodity markets was traced back to the US President. In the coffee market, hedge funds built the largest ever short position in anticipation of a record harvest in Brazil. However, the coffee price has already touched a two-year low and it remains to be seen whether a potential supply glut can depress prices any further. Naturally, we recommend staying tuned on the Kairos portal for the latest forecast on coffee prices and other commodity markets.